Iran – Part Four. Economy

The economy of the Islamic Republic of Iran is a mixed economy with a large state-owned sector which is the largest in the Middle East in terms of GDP. It ranks 21st in the world in terms of purchasing power parity. Roughly 60% of Iran’s economy is centrally controlled and dominated by the oil and gas sectors. Iran has 10% of the world’s proven oil reserves and 15% of gas reserves.

The revolution in Iran did not have an economic strategy or a clear vision for the development and organization of the Iranian economy, in addition to its distance from the workers and farmers class, despite the fact that it proposed some economic policies that could be called the Islamic economic development strategy.

The major shift in politics after the revolution can be described as urbanist and elite-centric to rural-biased and populist. The pro-revolutionary approach to the rural areas and the poor left its mark by building infrastructure that eliminated the rural-urban divide, a relic of Iran’s feudal past. The expansion of basic services such as electricity, clean drinking water, health and education after the revolution sharply reduced poverty and the general 1990 to the late 2000s, Iran’s economy was on an upward trajectory. But it began to decline after world powers imposed crippling sanctions in an effort to get Iran’s leaders to agree to curb their nuclear programme. The 2015 nuclear deal with the United States brought relief, but less than three years later, US President Donald Trump abandoned the deal and reimposed sanctions that halted most of Iran’s oil exports. Iran’s economy is trying its gradual recovery from a decade-long slump that saw two rounds of economic sanctions. Oil prices and the Covid-19 pandemic were the main factor in it. Despite adjustments that partially offset the impact of external shocks, the economy remains constrained by widespread inefficiencies and price distortions. The economic recovery mainly started in mid-2020, driven by the oil sector. The challenges of climate change in Iran have also hurt growth, especially in the labor-intensive agricultural and industrial sectors, in the wake of higher temperatures and lower rainfall. These factors limit the pace of recovery and the dynamism of the economy in forecasts.

The World Bank predicted that Iran’s GDP growth would drop to less than 2 percent in 2024. The past year witnessed a significant rise in inflation rates and a historic decline in the value of the Iranian rial. The protests that followed the death of 22-year-old Kurdish woman Mahsa Amini amplified the creaking in the country’s economy. According to statistics, more than half of the population lives below the poverty line due to high prices. The country’s debt-to-GDP ratio rose to 45% in 2020 and the unemployment rate is more than 14%. To increase revenues, Iran has increased its oil exports to China to more than 1.2 million barrels per day. Sanctions have actually caused Iran to warm up with Western competitors such as China and Russia. In a major development, China announced an investment of 400 billion US dollars in the Iranian energy sector, spread over 25 years. Iran and Russia are said to be in talks about introducing a stable currency, backed by gold, to bypass Western sanctions in cross-border transactions.

Risks to Iran’s economic outlook remain significant. Intense climate change challenges as well as energy shortages and hyperinflation can greatly affect future economic prospects, and pose a potential threat to social tensions. Other downside risks relate to a renewed outbreak of COVID-19, a further slowdown in global demand and an increase in geopolitical tensions. Projected growth prospects could be stronger if economic sanctions are lifted. Higher oil prices could also further improve fiscal and external balances.

No comments

contact us